KPMG: Make carbon tax more cost-effective

Singapore is set to announce its revised carbon tax rate at the upcoming Budget 2022 on Feb 18. The environmental tax is put in place to change the behaviour of taxpayers and encourage them to switch to cleaner energy sources. Deputy Prime Minister Heng Swee Keat first spoke about the review of Singapore’s carbon tax at the unveiling of Budget 2021. On Feb 16 last year, Heng said: “We will announce the outcome of the review at Budget 2022 to give time for businesses to adjust to any revision in the carbon tax trajectory.”

First announced at Budget 2018, Singapore’s carbon tax rate is fixed at $5 per tonne of carbon dioxide equivalent (tCO2e) until 2023. Unlike typical grouses about taxes, some think the rate is far too low. “The general consensus among the scientific community is that carbon prices and carbon tax rates are currently far too low. These rates will need to be significantly increased if the world is to reach net zero emissions by 2050,” says Mark Addy, a partner at professional services firm KPMG in Singapore.

Singapore’s carbon tax rate of $5 per tCO2e pales in comparison to Sweden — which has the highest rate in the world — at around US$130 ($175), and the EU at around US$90. However, to be a genuine driver of change, the carbon tax needs to be set at a level that makes it more cost-effective for taxpayers, says Ajay Kumar Sanganeria, partner and head of tax at KPMG in Singapore. This will help redirect funding and resources towards greener solutions, he adds. Aside from simply raising the carbon tax rate, the government may also broaden the scope of taxation to cover a larger number of facilities, says KPMG.

Currently, the power industry is the sector most affected by the carbon tax in Singapore, says Addy. “Further increases in the carbon tax rate may translate to higher prices of electricity for consumption.”

Singapore’s carbon tax currently does not apply to land transport fuels as such fuels are already subject to excise duties, he adds. “We do not anticipate the carbon tax being expanded to cover this. Instead, the authorities will likely continue to encourage the use of electric vehicles and ramp up the related infrastructure.”

Instead, the government may lower the emissions threshold for carbon tax purposes. The emissions threshold is currently set at 25,000 tCO2e per year, which targets only the larger facilities, says Addy. If this threshold is reduced, many smaller manufacturing facilities, including those producing essential goods, could come under the scope of carbon taxes, and there may be a knock-on effect on the price of everyday products.

Looking regionally, many countries in Asia have not yet introduced carbon taxes or carbon pricing measures. Hence, a significant increase could impact Singapore’s regional competitiveness, says Addy.

A sharp increase in Singapore’s carbon tax rate could be counter-productive in the short-term and may even hinder broader economic progress, he adds. “Where Singapore can look to differentiate itself from other countries is through combining increased carbon taxes with incentives and support for businesses that invest in environmental, social and governance (ESG) initiatives and switch to greener alternatives.”

These could include a partial tax exemption on taxable gains derived from green property sales and allowances on capital investments, or grants or enhanced tax deductions for companies that undertake environmental studies to assess their carbon footprint or energy efficiency.

The government could also increase incentives for financial institutions to encourage more “green lending”, says Addy. These include reduced tax rates on interest income on loans used for development of green properties, or tax exemptions for investors on income derived from bonds where funds are used for green investments.

The ultimate hope is that the carbon tax rate will eventually reach a point where it becomes more cost effective for emitters to switch to more energy efficient solutions, says Sanganeria. “To cushion the impact on consumers in the short-term, the government may look at introducing subsidies for lower-income households to cope with increasing electricity prices,” he adds. “Authorities could also introduce vouchers or incentives that make it more affordable for families to purchase energy efficient appliances.”